November 2017 Newsletters
by Victoria E. Stephen, Associate General Counsel
In the last hours of October 24, 2017, the U.S. Senate voted to repeal what many considered an onerous rule prohibiting arbitration agreements in the financial services industry and beyond, taking probably the most important step in the rule’s demise.
The “Arbitration Agreements” final rule was one of the jewels in the crown of the Consumer Financial Protection Bureau (CFPB). On July 10, 2017, the CFPB issued the 775-page final rule that effectively blocked the use of mandatory arbitration clauses that have come to be the norm in most financial agreements today. The Rule became effective September 18, 2017, but mandatory compliance was not required until March 19, 2018.
Earlier this year, the U.S. House of Representatives passed a resolution voting down the rule. The Senate vote was split right down the middle with Vice President Mike Pence becoming the tiebreaker, casting the final vote to allow it to pass 51-50. As of this writing, the last step is for President Trump to sign the reversal into law, which should happen swiftly in the coming days.
Those in support of the rule, including one of its biggest defenders, Democratic Senator Elizabeth Warren of Massachusetts, claim that it would protect consumers by allowing them to file class action suits directly against banks and other companies.
Those against the rule claim that it would actually harm the very consumers it was designed to protect by increasing the costs of products and services as result of banks having to defend expensive lawsuits. This is in addition to considering that class action lawsuits in general provide little restitution to plaintiffs, but excellent payoffs for plaintiffs’ lawyers. The CFPB’s own study showed that 87% of class actions provide absolutely no financial compensation to consumers. The lawyers, on the other hand, can make more than a million dollars per case on average.
Acting Comptroller of the Currency, Keith A. Noreika issued a statement along these lines, saying that the rule “would have likely increased the cost of credit for hardworking Americans and made it more difficult for small community banks to resolve differences with their customers without achieving the rule’s goal of deterring future financial abuse.”
The signaling from this move goes beyond saving banks from having to ban arbitration agreements. Despite much rhetoric of undoing an “unaccountable and unconstitutional” CFPB, the Trump administration has done little to make good on that promise in its first year…until now. This is the first major indication from the GOP that it is not timorous of the CFPB’s rule that has been all but untouchable in the Obama era. Time will tell whether this is a singular effort to prevent a particularly burdensome rule, or the beginnings of the President’s vow to “do a big number” on Dodd Frank.
Temporary Exceptions to Appraisal Requirements Granted
by Elizabeth K. Madlem, Associate General Counsel
On October 17, 2017, the Agencies (Federal Reserve System, FDIC, NCUA, and OCC) issued a Joint Press Release Regulatory Relief statement allowing for temporary exemptions to the Title XI of FIRREA appraisal requirements in areas affected by Hurricanes Harvey, Irma and Maria. This relief will provide some flexibility to appraisal requirements for financial institutions underwriting any real estate-related transactions in Florida, Georgia, Puerto Rico, Texas and the U.S. Virgin Islands. The disruptions to the real estate markets in those regions interfere with the bank’s ability to obtain appraisals that comply with the Title XI statutory and regulatory requirements. Additionally, recovery from these major disasters would be facilitated by exempting these transactions.
During this time period, financial institutions will remain consistent with the required safety and soundness concerns if they determine and maintain appropriate documentation of the following:
- The property involved was located in a major disaster area;
- There is a binding commitment to fund the transaction that was entered into on or within thirty-six (36) months of the date that the area was declared a major disaster;
- The value of the real property supports the institution’s decision to enter into the transaction; and
- The transaction must continue to be subject to review by management and the Agencies in the course of examinations of the institution.
Exceptions made pursuant to section 1123 of the FIRREA may be provided for no more than three years after the President determines a major disaster exists in a particular area. In all cases of recent disasters, the Agencies have determined that the exception provided will expire within three years after the declaration was made. For binding commitments to fund a transaction in an area declared a major disaster, the expiration is as follows:
- Texas – August 25, 2017, but no later than August 24, 2020;
- U.S. Virgin Islands – September 7, 2017, but no later than September 6, 2020;
- Florida and Puerto Rico – September 10, 2017, but no later than September 9, 2020;
- Georgia – September 15, 2017, but no later than September 14, 2020
- Puerto Rico – September 20, 2017, but no later than September 19, 2020; and
- U.S. Virgin Islands – September 21, 2017, but no later than September 20, 2020.
So what does this mean for financial institutions in these affected areas? During this window of three years, commitments to fund entered into on or within thirty-six (36) months prior to the declaration of a disaster area will not have to follow Title XI’s requirement of having appraisals be performed by appraisers according to its standards. Banks will need to document to show proof of the property meeting the time and location requirements. A copy of the Joint Press Release regarding these Temporary Exceptions can be found here, which outlines specific counties for states and municipalities for territories.